The buyer is requiring us to carry a subordinated seller note, but their senior bank lender wants a strict subordination agreement with a long blockage period. How do we limit this blockage period so a minor senior loan covenant default does not freeze our payments?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a junior lender to the buyer, and the senior bank will always demand first-priority rights to the company's cash flow. The real danger lies in the subordination agreement, specifically the blockage covenant. This clause allows the senior bank to completely freeze your seller note payments if the buyer commits a default on their senior loan. To prevent a minor administrative or financial covenant slip-up from cutting off your cash flow, you must aggressively negotiate the terms of this blockage period. First, limit the length of any payment blockage to a maximum of ninety or one hundred and twenty days, rather than an indefinite freeze. Second, ensure the senior lender can only trigger a blockage once in any twelve-month period for the same default. Third, specify that payments must immediately resume, including any missed back-payments, once the blockage period expires or if the default is waived by the bank. Use your weekly Level 10 Meeting to review the buyer's post-closing financial health and track their compliance. By putting these boundaries around the subordination agreement, you protect your cash flow and ensure you are not paying a dumb tax for operational mistakes made by the new owners.